An advice till the censorship of science by the directorate of the Centraal Planbureau is lifted

Olli Rehn’s backyard

My Finnish correspondent reports:

It was interesting to read on Dijsselbloem and your views on the problem. It seems that we have a most awkward situation with our present government: they are afraid to make any meaningful or significant move to stop the economic free fall. We have a coalition government made of six parties and they have all made promises at last elections (not to increase pension age, taxes or cut services). Our national budget is 55 Bn euros and we are borrowing 9 Bn to cover expenditure! It is an impossible formula as 24% of our industrial companies are making a loss at the moment. Can’t devalue any more and industries are not investing in Finland. We are on the road to a Greek crisis…

The correspondent wrote this on August 27 and on August 30 Bloomberg reported that the six party coalition had reached an agreement w.r.t. the ageing society and pensions by 2017:

“Finland is at a crossroads,” Finance Minister Jutta Urpilainen said yesterday. “Either we let the welfare society wither or we defend it decisively.”

Finland is in dire straights indeed. The Bank of Finland wrote in March about a recession of -0.2 in 2012 and -0.8 in 2013, but Statistics Finland recently revised the figure for 2012 downwards to -0.8 too. (PM. The budget size of 55 bn can be found in the National Accounts p93 code P1R.)

The EU budget czar Olli Rehn comes from Finland. He has been given the job to warrant budget austerity, with the rationale that this is required for Southern Europe with values above 80% Debt to GDP and hence also for Northern Europe with values below 80% Debt to GDP. He exerts that job with stout Finnish determination.

I would advise him however to consider Finnish unemployment.

Finnish unemployment rate and trend. (Source: Statistics Finland)

The crisis added at least 2% unemployment on average. The increase apparently was caused more by external events rather than internal (“Greek”) events. The proper reponse then would be to invest to get unemployment down again. See my earlier texts about national investment banks. A larger deficit could be accepted if the funds are invested into higher productivity and more internal employment to counter the adverse external shock. Now Finland seems to have the worse: borrowing that goes into consumption plus a persistent higher unemployment.

Olli Rehn apparently has studied some economics but is not a fully trained economist. It is difficult to argue economics with someone with that background. But perhaps the problems in his own backyard help him to turn around. Then, of course, he still has to face up to the misconceptions of Angela Merkel and Jeroen Dijsselbloem …